The Energy Space

*On December 27th, EOXLive published a 2013 outlook for crude oil and natural gas. If you have not received it or would like a copy, please email tpawlicki@eoxlive.com.

Energy Price Outlook

The oil market may remain in a mixed trend in the near-term as it has in the last three sessions, with underlying factors somewhat balanced. Recent support has been given by improved signs of economic growth, COT data, the grounding of Shell's oil rig in Alaska, and the ramp-up of the expanded Seaway pipeline this week. Environmental groups have already called on the president to suspend drilling permits in the Arctic. Opposing pressure will be provided by the possibility of a rebound in crude oil stocks in Wednesday's DOE report, potentially weaker demand in light of higher prices, and from technical resistance near $94.00. The pipeline expansion should help WTI against Brent crude, and we entered a spread recommendation in June futures at -$14.25 on Friday morning, with a target at -$8.00.

Yesterday's trade settled 10 cents higher in WTI and 9 cents higher in Brent. The market seemed to gain support once again from the prospect of improved economic conditions. The Chinese PMI data a week ago helped to kick-start the rally, while the payroll report and fiscal cliff solution gave another boost last week. The delay of Basel 3 capital increases for banks helped the European markets trade higher yesterday. These factors also led to a new five-year high in the S&P 500 index on Friday, which is also a precursor to future growth. Large funds have picked up on these developments, and added 18,992 contracts to the managed money net long through last week. The non-commercial category saw an inflow of 3,371 contracts.

The Brent-WTI differential may continue to narrow in the near-term, as the Seaway pipeline is scheduled to ramp-up to full rates this week. The pipeline runs between Cushing Oklahoma and Freeport Texas, and will begin transporting 400 kb/d of WTI crude to the Gulf Coast rather than the 150 kb/d that was the case previously.

Global Economic & Dollar News

» Basel III Regulations were relaxed in order to give banks four more years and additional flexibility to build up cash reserves.

» The White House may use the framework of spending cuts that were being discussed in Dec as a starting point for new talks in front of the debt ceiling. Pres Obama, however, still wants to raise $600B in new revenue through cutting deductions and closing loopholes.

» Senate Minority Leader McConnell reiterated over the weekend that the tax issue is over and that the focus needs to turn to spending.

Upcoming Events

Tue - API Inventories (4:30pm EST)

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - ECB & BOE Meetings

Thu - Natural Gas Inventories (10:30am EST)

Jan 16th - Iran-IAEA Meeting

Jan 29-30 - FOMC Meeting

Mar 1st - Sequester Begins

May 31st - OPEC Meeting

Analysis

EIA Inventory Preview

Crude oil stocks may reverse the downward trend that usually takes place at year-end and begin building again. Our expectation is for a build of 2.0 MB this week. The five-year average shows an increase of around 41.6 MB between the last week of the year and the peak in inventories in early-May, as refiners add to stocks in anticipation of the summer demand season. In the current week, the five-year gains 0.6 MB. Support for inventories may be offered by a rebound in imports, which typically recover strongly in the first couple weeks of the year. Demand may add as well, as consumer demand may have been rationed due to late-Dec price gains as well as worries over the fiscal cliff. Some spillover effects of the cliff may have included weakness in equity prices, which may thus have offered a reverse wealth effect. On the flipside, pressure on inventories may come from utilization levels that ended 2012 more than 5.0% above the five-year average.

Gasoline inventories typically build sharply into early-Feb before supplies begin being shipped for increases in demand tied to late-spring and the summer driving season. We would anticipate a build of 3.0 MB in gasoline and 3.0 MB in distillates. The level of distillate stocks recovered late in 2012 due both to higher refinery production as well as weakness in demand.

Natural gas inventories may fall 170 bcf this week, as heating degree days increased to around 238 from 212-220 previously. Temperatures were generally below-normal across the majority of the country from west to east, with the exception of the northern Great Plains and parts of the desert Southwest. The 238 degree day reading is higher than anything seen last season, where the peak was made at 218-220. Inventories fell 192 bcf that week in what was the largest draw of the season. Given increased production levels being seen this year, however, we wouldn't anticipate any draw that large.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Monday morning, 1/7/12

The markets are trying to recover from the bad hang over of the first week of 2013 as grain markets are testing areas that have not been seen since before the start of the worst drought in 100 years.

The genetics of these seeds continue to amaze nearly everyone as Informa now pegs the bean yield over 40 bushels an acre, this is with basically 1 decent rain event in late August, it's going to be nearly impossible to get anyone to believe that a drought can do that much damage to a crop ever again. We say this with some sarcasm as we have learned that it's not necessarily the amount of rain but rather the timing of it. The reality is that once again the world continues to consume nearly every grain that is produced and with the high prices the global expansion of grains is at a pace that has never been seen before, but does this pace continue if prices drop? The likelihood is not. As of today Ukraine is offering corn cheaper than Argentina and Argentina is still cheaper than the US, so the bottom line is that the US is not priced to do any business and with SA harvest only weeks away the window for doing export business is quickly coming to a close. The beans are facing the same dilemma as SA harvest is already under way and they are only weeks away from getting the exports started in a robust way.

The USDA will issue the final production figures on Friday and over the past 5 of 6 years the market has experienced a limit move on this day. The reality is that even with tighter stocks (if they even are) the market may quickly rally but be faced with tremendous selling from SA and other growing regions.

The weather in SA remains very good for crop development and appears that record crops will be produced in nearly every corner of SA. The only concern now (and its short lived) is that some of the early harvesting areas are experiencing excessive rain and is postponing some harvest, it needs to be noted that this is not hurting the crops only delaying some of the harvest.

The OI changes in futures shows the index activity as wheat increased by 5016, meal increased by 3523, and beans fell by 171, oil was down 2437 and corn fell by 182.

The option markets quickly caught a bid to things last week as both movement picked up and the return of capital also came back into play. The options will most likely continue to have bids to them throughout the week as the January report is one that has proven to be a vicious market mover. The future spreads are still heavily inverted in corn which still seems to point towards owning the gamma over the Vega. The meal premium is 3-4% over the beans which at this point seems like it should be sold vs. beans. The CH-WH has fallen to the lowest levels in months while the deferred are still much higher, look to own WH calls vs. CH calls and in the deferred to own CZ calls vs. selling WZ calls.